I'm a Fellow at the Adam Smith Institute in London, a writer here and there on this and that and strangely, one of the global experts on the metal scandium, one of the rare earths. An odd thing to be but someone does have to be such and in this flavour of our universe I am. I have written for The Times, Daily Telegraph, Express, Independent, City AM, Wall Street Journal, Philadelphia Inquirer and online for the ASI, IEA, Social Affairs Unit, Spectator, The Guardian, The Register and Techcentralstation. I've also ghosted pieces for several UK politicians in many of the UK papers, including the Daily Sport.

What Bomb Buried in Obamacare?

I’m very confused by this piece from fellow Forbes contributor Rick Ungar. He tells us that there’s a bomb buried in Obamacare (or more formally, the Patient Protection and Affordable Care Act) and that it’s just gone off. Further, that it will mean the end of private, for profit, health care insurance on any large scale: whatever remains will be just a luxury item for those who like to beat the queues as such insurance is in the UK where we have the NHS.

That would be the provision of the law, called the medical loss ratio, that requires health insurance companies to spend 80% of the consumers’ premium dollars they collect—85% for large group insurers—on actual medical care rather than overhead, marketing expenses and profit. Failure on the part of insurers to meet this requirement will result in the insurers having to send their customers a rebate check representing the amount in which they underspend on actual medical care.

This is the true ‘bomb’ contained in Obamacare and the one item that will have more impact on the future of how medical care is paid for in this country than anything we’ve seen in quite some time. Indeed, it is this aspect of the law that represents the true ‘death panel’ found in Obamacare—but not one that is going to lead to the death of American consumers. Rather, the medical loss ratio will, ultimately, lead to the death of large parts of the private, for-profit health insurance industry.

Why? Because there is absolutely no way for-profit health insurers are going to be able to learn how to get by and still make a profit while being forced to spend at least 80 percent of their receipts providing their customers with the coverage for which they paid.

What confuses me here is that in a competitive market it’s entirely normal for an insurer to have a loss ratio higher than 80%. There are plenty of entirely profitable and growing insurance companies that have loss ratios over 100%. So I cannot really understand why the law insisting on an MLR of 80% (or 85% in the large group market) is going to cause all for profit insurance companies to fall over.

This idea of a loss ratio over 100% is a little odd, of course, but allow me to explain it. There are two entirely different income streams for an insurance company. One is the premiums that are paid in: we can all see that one and understand it. The second is the hidden one that most don’t understand is there: that’s the investment income gained from having those premiums in between their collection and the need to pay them out again on a claim.

Depending upon what type of insurance policy you’re writing that gap, the time you get to hold the money for, can be really quite large. Say, just as a wild example, you’re writing hurricane insurance (whether or not hurricane insurance actually exists or not is irrelevant to the example). Even if you’re writing it for houses on the Outer Banks of the Carolinas you still only expect any specific house or area to get hit once every few decades. So you get to hold onto, and invest, those insurance premiums for decades. A time in which some fairly juicy investment returns can be made.

At the other end we’ve parts of health insurance. A goodly part of health insurance isn’t in fact insurance: it’s assurance. We all do go to the doctor, all do get our shots, check ups and so on and this is a claim to the insurer. So they might only have our premiums for a few months at most before we claim it back in the form of health care. But another part of health insurance really is insurance: we’re buying insurance against a horrible car smash, a case of cancer. And we might never claim on that at all: the insurers thus being able to keep that money again for decades, decades in which substantial investment income can be made.

Now, we the customers don’t know much about this investment income: but everyone else running an insurance company most certainly does. So, as I’ve pointed out elsewhere, it’s entirely normal for a car insurance company to be paying out more than 100% of the premiums every year. A loss ratio of over 100%, let alone 80%.

For as everyone running an insurance company knows, those profits from investment are there, so premiums are cut in competition to gain access to that cashflow and the profits that can be made from managing that cashflow.

So, that’s the background. It’s simply not unusual for an insurance company to have a high loss ratio indeed, the more competitive the market is the higher we expect it to be as investment income is used to subsidise premiums. For the flow of premiums is what makes the investment income possible.

However, as above, this does vary dependent upon what type of insurance is being written and thus how long the insurer gets to play investment banker with the premiums. Perhaps so much of US health insurance is in fact assurance that there’s not much such profit to be made? And thus the loss ratios will be quite low and thus strongly affected by the new law?

No, I didn’t know either until I went and looked it up. But here’s the GAO report on what are the medical loss ratios for US health care insurers.

It’s the two charts on pages 12 and 14 that you want to look at (and darn this new technology thing that prevents me embedding them!) and as you can see a majority of insurers are well over the 80 and 85% targets already.

From 2006 through 2009, insurers’ traditional MLR averages generally exceeded the PPACA MLR standards—80 percent for the individual and small group markets and 85 percent for the large group market.

We should note that the new, PPACA MLR standards are actually easier to pass than the traditional method of calculating MLRs.

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Well, yes, but…..the majority of those not meeting the small group and individual are those offering under 75,000 life years. Where the rules don’t in fact apply in the same way.

Essentially the rules say that if you’re only a minor player (for the usual odd reasons, you’re big in one state, a few people just over the line use you, you’re big in one market but that bleeds into another) then you don’t actually have to meet the 80 or 85% rules.

And almost all of those who don’t meet the rules come under this exemption. So I’m still not convinced that this is really going to make much difference at all.

Each dollar spent complying with the new regulations will be one less dollar available to be paid for a patient needing care. I am not naive enough to believe that the whole dollar would have been spent on patient care, but even if 10 cents were spent on patient care and 90 cents went directly to CEO bonuses, there would be an overall increase in spending on patient care without the regulation.

You miss the point. People have been denied health care by the millions and that lead to the death of millions of Americans of all ages. The reason our Infant Morality Rate is/was 38th in World Health- the numbers are- over a half a million infants die in the USA before the age of 1. Lack of access to health care. Preventable. Then we have CEO of these insurance co. getting quarterly bonus of 30 million on the top side and the lower, 9 million and then tricle that down to the vice-presidents and so on. And that isn’t even their salary- it is their quarterly bonus!!! Our troubles began when health insurance co. decided to go for profit. Sadly, you can always find someone who is willing to take blood money. Shareholders in a doctor’s office or sick room has lead to a very costly doom. Thank God, Affordable Health care goes BOOM! Oh, and I have been using Obamacare since 2010- I was “uninsurable”- and it is great. Easy to use; to finally have the access to doctors to help me. There are no words. Here is my final word. Anytime there has been an issue Human Rights in the United States, be it Slavery, Suffrage, Civil Rights, and now Health care Reform; there are the few who profit off the pain and suffering and death of so many. The time has come set things right. Thank You President Obama for standing strong.

Mr. Worstall: Thank you for presenting another side of the argument. Do you think the greater issue is not the 80% MLRs, but the actual cost of medical treatment that is charged to the insurance company or the individual? What prevents healthcare providers from increasing the cost of care given? What keeps the cost of healthcare competitive? What prevents doctors from recommending more expensive and complicated procedures at the cost of private insurance companies/ federal health care program or the patients?

Maybe its just a limp wristed piece of legislation desgined merely to hold the health insurance companies to something resembling accountability. I’m sure it’ll be easier for them to pay out on insurance claims than to organise those rebates so they will be incentivised to actually cover the people they’re supposed to be covering.

The so called bomb sounds intimidating, and to the average person at first glance sounds like an impressive step forward. but yeah… progressive legislation is notorious for this. sounding like its going to be the greatest thing ever, but ends up really lacking any of the promised punch.

Picture in your mind trying to pick up a drop of Mercury with your fingers, just how successful do you anticipate being? This legislation is seeking similarly, pushing on one end only to have the system squeeze out another.

Just think of this a minute, what happens on the other side of the profit distribution curve, what happens when a large insurance company begins to have negative revenue, loosing 20% per year above expenses, does the Government fill that gap? Is the Government prepared to take over that function, and in so doing, can it do the same work as effectively? Before you answer that, consider the challenges the post office is having.

I am one of the evil health insurance brokers who the author doesn’t give a rat’s *ss about but I am not too worried. If my industry is put out of business buy a government based one payer system I will simply sell something else. Perhaps funeral plots and cremations… as demand for those will no doubt go up.

The feds have proven over and over and over again that they do a lousy job of being a payer. Medicare and Medicaid is a mess and rampant with fraud. The recent revelation of a quarter billion dollars in penis pumps paid for by Medicare pops up in my mind. These examples are endless.

As a broker… I work with many different payers and they all provide a different level of service to their members. We recommend good carriers… the ones our clients don’t complain about… so they continue to be our clients for a long time. It’s kind of the whole idea of being in business in the first place.

There are good and not so good payers out there because there is competition and some companies quite frankly are better managed than others.

When the government one payer the author refers to becomes a nightmare to deal with there will be nowhere else to go. And more people will die. The people in Washington… you know… all those insider traders who make laws that don’t apply to themselves, they know the real money is in holding the investment reserves and THAT is what they want to get their corrupt little hands on.

And while I know there are cases of private payer abuse, I have NEVER in my career seen an example such as the girl who has cancer but left off acne medicine from the app and gets kicked to the medical curb. I’m sure it’s happened but NEVER to any of our clients. I do however get many compliments and testimonials from people about how awesome their medical issues were handled by the payer we suggested to them and how good their experience was.

One payer systems have not really worked anywhere else they have been tried – I read horror story after horror story.

Oh… and 2 days after the “Obamacare Bomb” went off… I got a call from my best carrier (payer) to tell me my commissions are going back up… as they are getting a handle on the MLR thing.

It’s amazing to see the author write with such confidence and authority… when describing the elephant as a snake… because he is blind and only touching the trunk.

Mr. Unger… Please save your Hallelujahs for when you take your sick children to the future government based medical system you are so giddy about. You’ll need them!

I could not have said it better myself. People do not realize how good private medical insurance companies are. All of the problems my family have had with insurance have been with goverment run insurance. There is a reason they call it try to care. Also when she takes her family to the doctor with her signle payer insurance good luck finding a doctor because there will not be any there because they could not keep their practices open due to lack of money!!!

For the government to interfere in healthcare insurance is surprising unless we realize that the Obama administration is seeking to fundamentally change how we do business. Do most citizens want government interfering in every part of life? If we could believe that there actually were more citizens who voted for Obama than for freedom in the last general election, we might also believe in socialism for this nation. But with so many evidences that some (many) of the votes for Obama were not cast by living and qualified voters, we have good reason to doubt that most U.S.A. citizens do in fact want fundamental change in our republic.